Google Offers Peek At Core Strength
February 01 2016 - 3:02AM
Dow Jones News
(FROM THE WALL STREET JOURNAL 2/1/16)
By Alistair Barr
Google reports its latest financial results on Monday, with new
details that may prompt some to see the company in a different
light.
The Internet search giant reorganized itself as Alphabet Inc.
last year, to separate its core businesses from its far-flung bets
on driverless cars, smart homes and health care. Alphabet will for
the first time disclose the revenue, operating income and capital
expenditures for the two segments on Monday and provide historical
figures dating to 2013.
For the parent company, Wall Street expects fourth-quarter
revenue of $21 billion and earnings per share of $8.09, according
to Thomson Reuters data. But analysts and investors are more
interested in the segment details.
With added spending on its new projects, Alphabet's profit
margins have been shrinking in recent years. Profit margin
excluding interest and taxes fell to 26.2% in 2015, from 30.6% in
2007, according to Michael Nathanson, an analyst at
MoffettNathanson Research.
But Mr. Nathanson expects the new numbers to show the core
Google unit with a 31.5% profit margin last year -- higher than the
2007 figure.
The analyst estimates the core Google unit made $32 billion in
earnings before interest, tax, depreciation and amortization last
year. The other units, which Alphabet calls "Other Bets," lost $2.3
billion, he projects.
"Google should get more profitable with each new dollar of
revenue, but we haven't seen that in recent years because Google
has been investing in all these new businesses, and that's dragged
overall profitability lower," Mr. Nathanson said. "If the new
numbers reveal this underlying leverage in Google's main business,
that's bullish."
The analyst has put a value on this new transparency. Based on a
clearer view of higher profit in Google's core, he estimated in
December the company was worth $582.5 billion, or $840 a share.
That is up from a previous valuation of $558.5 billion, or $805 a
share. Alphabet shares closed Friday at $761.35, up $13.05.
Put another way, an extra glimpse inside Alphabet's main profit
engine has added $24 billion to the company's value, or more than
twice the value of Twitter Inc., in the eyes of one analyst.
There is precedent for this. In the past 1 1/2 years, Amazon.com
Inc., Netflix Inc. and Expedia Inc. disclosed more information
about different parts of their businesses. Shares of all three
rose.
Amazon's new numbers revealed a cloud-computing business that
was a lot more profitable than investors thought. Expedia broke out
losses from a Chinese business called eLong, giving investors a
better view of the profits of its main business.
Mark Mahaney, an analyst at RBC Capital Markets, expects
Alphabet's new disclosures to follow the Expedia pattern.
"Core Google is more profitable than Alphabet as a whole. The
question is by how much and whether the core is getting more
profitable," he said. "We want to see leverage there."
Alphabet shares may already have received a boost. They are up
more than 13% since Oct. 22, when the company said it planned to
report more detailed results. The Nasdaq Composite Index is down
almost 5% in the same period.
Then, there is this irony: Profit margins of the main Google
business may be dented by heavy investments in cloud computing, to
keep pace with Amazon, said Neil Doshi, an analyst at Mizuho
Securities USA.
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(END) Dow Jones Newswires
February 01, 2016 02:47 ET (07:47 GMT)
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